Which bills to pay first?
When you do not have enough money to cover your family’s basic living expenses and pay all your creditors, you face some difficult financial decisions.
During a crisis or anytime when family income is reduced, your spending habits must change. The sooner you change, the more likely your financial problems can be lessened. Your family should be part of the decision-making process because their cooperation is essential to carry out the plans.
When your bills exceed the money available to pay them, you will have to develop a revised payment plan in order to repay your debts. After you have a plan, you will have to contact the people to whom you owe money — your creditors — and explain your situation. Creditors will usually work with you to adjust your payments because they want their money.
Your past experiences with creditors are important. If you have consistently paid bills when due, your creditors will be more cooperative than if you were late or did not make regular payments. Creditors are in the business of lending money and providing services. They want to keep your business, but they also want to get paid.
Gather the Facts
Before you can talk to your creditors, you need to take a hard look at your situation and decide how much and when you can pay. First, answer the following questions:
—How much income can you count on each month?
—How much money is needed to cover your family’s essential monthly living expenses?
—How many creditors do you owe, and what is the total amount you owe?
—How long is your present financial situation likely to last?
—What assets (savings or items that could be sold) do you have that could be used to pay off your debt?
—What debts are the most important to repay first?
—What debts could be satisfied by voluntarily surrendering, or giving back, the item?
—Are any of your creditors offering deferments or waiving later fees during a crisis?
Who Gets Paid First?
You are legally obligated to pay all of your creditors. If you cannot pay all your bills, you must decide how much to pay to which creditor. One way is to divide available money and pay each creditor a share of what you owe. This is probably the fairest way, but it does not always work because every creditor must agree to reduce the amount they receive and extend the payment period.
A second method is to prioritize or list your creditors starting with the ones who will receive the most money. Think about the worst consequences for your family if certain debts were not paid or if they were paid less than the amount due. Answering the questions below will help you decide.
What will affect my family’s health and security the most? Usually the house, utilities, food, transportation and medical insurance take priority. Do not be tempted to let medical insurance slide when money is tight. If anyone in your family becomes ill, uninsured medical costs could be devastating.
What will you lose if the bills are not paid? You can lose your purchases if the creditor holds the title of the property as collateral or security for the loan, such as a home mortgage or car loan. Unsecured debts may have to take lower priority.
What interest rate are you paying? You may decide to pay off higher interest credit card balances first to reduce the amount of finance charges you are paying. Until your financial situation improves, destroying your credit cards may be a good idea. PowerPay is a free computer program that can help you decide which debt repayment plan will save you the most money in interest charges. It is available online at https://powerpay.org.
How much do you still owe on the loan? Determine how much you have paid on each loan and how much you owe. If you have only one or two payments to make on a loan, it is probably a good idea to finish paying it and getting that debt out of the way. You may be able to return newer items or sell them to pay off the debt. If you choose to voluntarily surrender the item, you will still be required to pay the difference between the market value of the item and the amount remaining on the loan.
Is a consolidation loan a good idea? Generally, consolidation loans charge a high interest rate. In addition, refinancing to smaller monthly payments will extend the number of payments you must make, adding to the total cost. While a single loan may make payment easier, that is a small benefit considering the additional costs involved.
What about your credit record? Nonpayment of debts is recorded on your credit record and can damage your ability to get credit in the future. That is why contacting all your creditors immediately if you cannot pay your bills is important. If you can pay something on each debt, it is less likely that your financial problems will be reported on your credit record.
Your Repayment Plan
Once you have calculated how much money your family has for monthly living expenses and for paying off debts, decide how much you can pay to each creditor based on the priorities you determined by answering the previous questions. Work out a repayment plan that shows how much you plan to pay each creditor.
Now you are ready to contact each of your creditors to explain your family situation. You will need to tell them how much you are able to pay and when you will be able to pay it. Some businesses, such as utility companies, have special counselors for customers who cannot pay their bills.
Contacting Your Creditors
Once you have gathered the information you need, contact each creditor, explain your family’s situation, and work out a solution. Be prepared to explain the following:
—The reason you cannot pay.
—Your current income and prospects for future income.
Your plans to bring this debt up-to-date and keep it current, including the amount you will be able to pay each month.
Do not forget creditors, like your dentist, physician, clinic and hospital. Contact creditors by phone, email or letter. If you phone, write down the name and title of the person to whom you talked. Follow the conversation with a letter or email summarizing the agreement between you and the creditor. Keep copies of your correspondence as well as any reply.
As you negotiate with each of your creditors, do not agree to any plan simply to get off the hook. Be sure you will be able to follow through on the agreement. Establish a payment rate that is acceptable to both you and the creditor.
—Valerie Vincent is the LSU AgCenter family and consumer sciences regional coordinator and Jeanette A. Tucker, LSU AgCenter family economist.